What’s the general
overview of the economy and how big a threat is inflation? What should investors do?
Certain parts of the economy have recovered, especially the digital ones, and Zerodha has been a significant beneficiary of what has happened in the last 18 months because what we had generally expected to happen in 5-6 years in terms of customer base has happened in these 18 months. There are large pockets though that need to catch up but slowly things are getting back to normal.
Inflation is a concern especially when we look at the US. Inflation affects all and we have seen how fuel prices have gone up and it could seep through. Digital players have more pricing power and they can pass on the inflationary concerns to customers but traditional players could find it tough. As a long term investor, you should hold a basket of stocks. And if you don’t understand companies and stocks, just buy an index fund and stay invested and allocate small amounts overtime. That’s the best way to be on top of the markets.
If you’re a retail investor who understands a particular industry, it makes sense to take direct stock exposure. Otherwise a retail investor the way he should look at it is that volatility isn’t over and what we have right now is a calm before the storm. Large volatility doesn’t disappear. It could be either upwards or downwards. Last really large bull run was in the late 90s, that whole dot com boom, the ferocity of the surge was crazy towards the end.
People had started calling the top in 1997 and it actually took 2-3 years before the markets really topped out of sorts. It could potentially be upwards or downwards. As an investor you should stay invested because India is a growing country. That’s the primary bet we all have. And everyone should sit on some cash when things are volatile it doesn’t make sense to be 100% invested. It makes sense to have some portion in cash, some in debt funds. So, your equity exposure isn’t 100%.
The problem is when your equity exposure is 100% and if there are drawdowns in the market people panic and exit at the worst times. Like for example last March-April (after the onset of Covid), people who were over leveraged of sorts and had 100% equity exposure saw 30-40% drawdowns in their portfolios and they panicked and exited. If they had endured the would have gained a lot. So I think as an investor, you should never have overexposure to equities or a certain sector or stocks.
How are youngsters picking stocks and has it upended the old ways of looking at them? What do you think of the new-age companies getting listed?
When it comes to youngsters, the worry is very little because of human capital. So, if you are a 22-year-old putting Rs 10,000 in stocks, even if you made a large mistake you’d lose Rs 10,000. It’s because young people have little exposure and they can potentially recover sooner. It’s a good thing because you want people of this country to back entrepreneurs and not keep money in FDs or gold and that’s the way our country will eventually grow.
So, young people coming to the market is not a worrying trend. A lot of them are probably making mistakes but really the best way to learn about finance and markets is by actually investing and not sitting and procrastinating.
Coming to companies and startups getting listed today, they don’t have profits but are growing too fast. We have to make peace with the fact that the older way of valuing businesses which is using Price to Earning or Price to Book has become a little redundant today. Making money has only gotten tougher. We were told about these ratios and intrinsic values the first time you picked value stocks. But the world has gotten more efficient and is factoring in what’s going to happen in 5 years or 10 years and you can’t make an investing decision based on past data which is available. Your investment decision has to be on future data which is basically looking at the target market where the business aspires to grow? Will the growth of that company continue?
A lot of these companies which aren’t efficient will disappear but the next big wealth creators will also be from this list because they are growing fast, they are digital and they are taking on traditional businesses. As an investor, you have to acknowledge that these companies bring a lot of risk. They are not profitable, they don’t have sufficient revenue and if tomorrow there’s a winter in terms of funding cycle for the next 2-3 years, they’ll burn through a lot of money they have raised and that can potentially put the business at risk. But out of every ten companies, there’s probably one Amazon which will continue to grow even without profits and revenue and will end up creating a lot of wealth. As an investor, think of these companies as high risk stocks and allocate only a small portion of your portfolio to it. And even within that portfolio it’s tough to call an Amazon. It’s hard to guess which of these companies will actually become a huge success just like the case with Amazon.
So if you have around 20-25% exposure to these high risk stocks, go with a basket of ten stocks so that even if one stock performs really well it’d help you recover capital you invested in other nine stocks. That’s how investors should look at it.
How much can one trust this rally?
It’s very tough for anyone to call. There’s so much liquidity rush. As long as there’s as much liquidity available, markets won’t go down. India is also lucked out in terms of what’s happening to China. All the capital that’s not going to China is searching for another destination. We are lucky right now. India can potentially continue to get a lot of money for a long period of time. If US stocks fall 10-15%, the liquidity trap could dry up pretty fast. Currently, people sitting on liquidity and wanting to invest in India are at an all time high. If I have to take a bet it’d be 70% upside and 30% downside.
What is the next big disruptor in trading space?
Crypto is the next big disruptor. There exists a regulatory arbitrage in India. Regulated people can’t offer crypto whereas unregulated people can. Crypto as a market can be termed very large. Majority of the broking industry and exchanges rely on active traders to generate revenue. Those who are actively trading are a small community and they can potentially switch slowly and steadily. Crypto has a lot of advantage over regulated space in terms of markets. They are open 24×7, intermediaries can offer limited leverage.
Can crypto pose a challenge to equities?
If Crypto prices keep going up, greed is going to keep sucking people in and to top it all there are advertisements that are enabling greed. It’s just a matter of time. How long will you sit if your equity portfolio is giving 10-15% a year and If cryptos are giving you 100% return a month. Eventually people will get greedy.
The problem is that players in the crypto market can do anything since the space is unregulated. For instance, if tomorrow, Zerodha or any other broker were to put an advertisement saying the prices will go up 50% or 100% over the next six months or one year the business will go up significantly but that cannot happen since we are regulated. The unregulated guys can do it. So as long as there’s this regulatory arbitrage it poses the biggest threat.
Is there any asset class that is dying? What about FDs?
There will always be people who would want to keep money in fixed deposits. I don’t think FDs will die and I don’t think banks will die. While there are a lot of these neobanks coming in, neobank still needs an underlying bank. I think in banking eventually you have to lend money. You have to build an asset and a liability side. And the asset side is not very easy. You need a lot of capital because the way to make money is by leveraging. You need to know how to manage risk well, manage liquidity well. Those core competencies aren’t easily available. Neobanks coming in are good for banking. There will be push from neobanks to existing banks to improve their user experience.
Is it correct to say that Mutual Fund is the new Fixed deposit?
We are a 100 crore plus population and even if 20-25 crore of them have money to invest somewhere we only have 10% of that investing in mutual funds. Of course, we are in Delhi, Mumbai, Bangalore and in our own bubbles. It seems like a lot of people are investing but there are vast swathes that still don’t park their money in markets.
The euphoria exists in those twitter,
bubbles. Mutual Fund compared to banking is nothing. And it will take more time for mutual funds to be the first destination but not right now.
What about the vast untapped market for equities? If someone has Rs 25,000 in Madurai, what should he do?
If someone has just Rs 25,000 that person shouldn’t come to equities. Not everyone can have exposure to equities. It makes no sense at all. If you are a 21-year-old having Rs 25,000 please go put it but if you are a 45-year-old with that sum, you shouldn’t.
While we have a lot of large numbers, people with money are far and few. You start looking at it and the target comes down. But as India grows the target market will grow. When we reach $4,000 GDP per capita people will have more money for discretionary spending, for investing. We still want people to invest and put their money in the best financial products.
If someone has Rs 25,000 in Madurai, he should probably put that money in the best financial products. It could be an FD, a debt instrument which is lower risk than equities but better returns than FDs.
What would you personally pick — Cryptos, Tech IPOs or iPhone?
Definitely not an iPhone. If you have Rs 10 lakhs in your account and if you want to spend a lakh on an iPhone, please go ahead but if you have just Rs one lakh and you borrow another Rs 50,000 please don’t buy it.
Personally, I haven’t been able to understand or appreciate cryptos as an assent class. In India it isn’t allowed regulatorily. I can’t say good or bad things about cryptos as I don’t really understand it. But it’s a very volatile asset. That’s what interests people. That’s what gets people in.
If you have to go by some of the claims of these people in terms of how many people are investing in cryptos, even if it’s a fraction, it is still sizable. It’s already disrupting in some form. But as long as regulations don’t allow it, it won’t really scale up.
What people miss out on is the concept of risk and portfolio allocation. How much of my portfolio can I really invest in cryptos? It’s a factor of risk. The riskier an asset class the lesser the exposure one should have.
If you have Rs 100 to spare, how much am I willing to take large risks with? It can’t be the entire Rs 100 because then you are a gambler and not an investor. So, you decide that you can take really large risks with 10%. I am okay if I lose Rs 10 completely. Now, you take those Rs 10 and you decide the riskiest asset class. It could either be crypto or a startup valued incredibly high. You shouldn’t concentrate an investible sum in just one asset.
What is the future of cash as an asset?
It’s a core part of portfolio allocation strategy. You shouldn’t be 100% invested at any point of time. You should always have some liquidity. You shouldn’t be selling stocks for some money you need. Based on one’s age, sitting on at least 10-20% of cash is required to deal with any eventuality. One needs to have sufficient liquidity to cover that. If you need money and markets aren’t doing well so you’ll be selling at large discounts. So, cash should play a significant role. When I was young, I kept some money in an account to which I had little access — no debit card, no online access. So I knew when I really needed it I could get it. But I also knew that it’s not in my wallet as a debit card so I cannot use it at any point of time.
Who’s a better investor — you or your brother?
Nikhil is infinitely a better trader. He manages all the money. I personally invest in fintech startups essentially to expand capital market reach without any ROI in mind. So in terms of startup investing, I think I am better.
How much should we trust star investors or Instagrammers?
It’s not a bad idea to listen to people about portfolio allocation and then try to figure out your own strategy. But stay away from people who claim that they make money easily or faster. Stock market is the toughest place in the world to make easy money. You’ve better odds of making money by buying a lottery ticket. It’s not easy. A few of the influencers say sensible stuff and you can’t paint everyone with the same brush. So someone like Morgan Housel (Author of bestselling ‘The Psychology of Money’)who’s active on social media and talks about saving and investing and you can’t paint him with the same brush.